Music industry braced for digital ruling

02 октября 2008

A long-running dispute over how to share the spoils of the digital music boom is due to be settled on Thursday as three Washington judges decide what royalties music publishers should receive from online music stores such as Apple’s iTunes.

Legal sites such as iTunes and eMusic which emerged early in the decade to challenge illegal peer-to-peer services originally adopted the 9.1 US cents per track rate that existed for compact discs.

The National Music Publishers’ Association is pressing for that to be raised to 15 cents, while DiMA, representing the download sites, is pushing for a cut to 4.8 cents, arguing that piracy limits the prices its members can charge.

The judges will also set “mechanical” royalties publishers earn from mobile ringtones and compact discs.

The stakes are high: Apple threatened last year that it might even shut iTunes if it could not run the store profitably, although music publishers note that Apple has not repeated the threat in its contract negotiations with them.

Apple would not comment. It does not disclose the profitability of iTunes but Andrew Hargreaves, an analyst at Pacific Crest Securities, estimates that it has made about $500m in profits from iTunes over the past 12 months.

“[Shutting iTunes] would be a pretty major move,” he said. “My guess would be that it’s hyperbole.”

The sums at stake are also large: An increase to 15 cents, while unlikely to apply retrospectively, would equate to $300m for the 5bn tracks that Apple had sold through iTunes by June this year.

Apple commands about 85 per cent of the US digital market, making iTunes larger than any other music retailer in the US, traditional or digital.

On Wednesday, both sides were reluctant to comment on their expectations for Thursday’s announcement by the Copyright Royalty Board, an offshoot of the Library of Congress, but made clear that it could be decisive in the fight over the economics of digital music.

“Songwriters who are struggling to make a living creating their art are looking for fair compensation, and this decision will determine whether the American songwriter can survive,” said David Israelite, president and chief executive of the NMPA.

One publisher, who would not be named, added: “Historically, the CRB has never reduced a rate. We hope they’ll either keep it the same or increase it.” Another said the CRB could stagger rate increases over the five years of the deal.

The judges are expected to ratify a settlement between DiMA, the NMPA and the Recording Industry Association of America agreed last week, which sets a mechanical royalty of 10.5 per cent of revenues for interactive streaming services such as Rhapsody and Napster.

With digital music groups adamantly opposed to any increase in the rate for permanent downloads, however, there are risks for publishers in Thursday’s ruling.

Eddy Cue, vice-president of iTunes, told the board last year that “[Apple] is in this business to make money, and would most likely not continue to operate [iTunes] if it were no longer possible to do so profitably.”

It was more likely that any royalty increase would be absorbed by the music industry, Mr Hargreaves said, leaving Apple’s wholesale prices for music unchanged.

In spite of incursions by Amazon, Wal-Mart, MySpace and others, Apple remains music companies’ biggest partner in the digital business on which they are relying for growth.

Without iTunes, consumers would flock to file-sharing sites from which music publishers make no revenues, Mr Hargreaves warned: “The music industry as a whole would be out several billion dollars.”